For the first time, Standard & Poor’s has rated a catastrophe bond, also known as a cat bond, based on the level of a storm surge. First Mutual Transportation Assurance Co., a subsidiary of the New York Metropolitan Transportation Authority, is working with a reinsurer in Bermuda that specializes in catastrophe bonds. The bonds have proved so popular that the amount being issued jumped from $125 million to $200 million. MTA stated that they probably could have raised more money, but closed the sale.

This is also the first cat bond that S&P has rated solely on the basis of modeling from RMS, the world leader in catastrophic risk modeling, and the first cat bonds sponsored by a transit agency. [For a fascinating look at how cat bonds came into being, read this New York Times article from 2007.]

The bonds are based on the risk of a surge from a named storm exceeding specific levels in two areas in the New York City metro area. Only two storms on record have produced surges this high, Hurricane Donna in 1960 and Superstorm Sandy last year. If a surge rises to the trigger level in the three-year life of the bonds, the investors sacrifice their principal, and MTA has funds to rebuild their system. If there is no triggering event, investors collect a nice return on their investment.

The MTA faced billions of dollars in repairs after Sandy, took on short-term debt, and squeezed their already tight budget. The issuance of these unusual bonds shows they are concerned about their ability to absorb another hit.

Insurance companies are worried as well, and a recent report estimated that the value of residential properties at risk tops $1 trillion. Far more assets—both public and private—are uninsured, which presents a financial risk to government budgets and well as to private companies. The extent and risks of this “climate resilience gap” were covered by Lindene Patton, Chief Climate Product Officer, Zurich Insurance Group, at our most recent Community of Practice.